Chinese loan growth and money supply surge in January

MarketWatch reports that China' s loan growth and money supply surge in January.

(emphasis mine) [my comment]

China loan growth, money supply surge in January
By Chris Oliver
Last update: 2:04 a.m. EST Feb. 12, 2009

HONG KONG (MarketWatch) -- New lending by Chinese banks surged in January and growth in the money supply accelerated as banks responded to calls by the government to help the economy.

New loans denominated in the Chinese currency amounted to 1.62 trillion yuan ($237 billion), up from 771.8 billion issued in December, according to data released Thursday by the People's Bank of China.

Loans extended by banks were up 21.3% at the end of January from a year earlier. Loan growth in December was 18.8% above the year-earlier month.

"Credit expansion in the first quarter of 2009 is likely to be very high," wrote J.P. Morgan's chairwoman of China equities, Jing Ulrich, in an e-mail to reporters Thursday.

Money supply, as measured by M2, climbed 18.8% at the end of January from a year earlier, accelerating from the 17.8% rise at the end of December, according to the PBOC.

Loans extended during the month accounted for nearly one-third of the 4.6 trillion yuan target set by Beijing for the year.

FXstreet reports that China's Jan M2 money, loan growth quickens.

INSTANT VIEW 4-China's Jan M2 money, loan growth quickens
Thu, Feb 12 2009, 02:51 GMT

BEIJING, Feb 12 (Reuters) - Annual growth in China's broad M2 measure of money supply quickened to 18.8 percent in January from 17.8 percent in December, the central bank said on Thursday.

Banks extended 1.62 trillion yuan in new local currency loans in the month, much more than December's 772 billion yuan, offering further evidence that Beijing's efforts to stimulate credit in support of its economic growth are bearing fruit.

***********************************************************

KEY POINTS:

-- Median forecast for M2 was 18.0 percent

-- Yuan lending up 21.3 percent, beating forecasts of a 19.5 percent rise. New loans in January alone hit 1.62 trillion yuan.

COMMENTARY:

GAO SHANWEN, CHIEF ECONOMIST WITH ESSENCE SECURITIES IN BEIJING:

"The drop in M1 was mainly due to corporate holdings of large amount of discounted bills.

"We think M1 will begin to trend up in the next several months as bill issuance falls.

"The widening gap between M2 and M1 growth shows loosening liquidity in the market. That will have a positive impact on the economy and will be reflected in the second half of the year with an acceleration in investment, recovery in the real estate market and even an increase in consumption."

GLENN MAGUIRE, CHIEF ASIA ECONOMIST AT SOCIETE GENERALE IN HONG KONG:

"The bank lending figures are just a stunningly good piece of news for China."
[Considering China is headed towards hyperinflation, no it is not good news]

He said the lending figures were the latest evidence that the economy is passing through an inflection point as the pace of deterioration slows.

"This dynamic of the banks being guided to lend for the government's infrastructure projects is falling into place dramatically quickly."

BIAN XUBAO, ANALYST WITH QILU SECURITIES IN JINAN:

"The growth in loans is very fast and not sustainable. January new yuan loans are already one-third of the total extended in 2008.

"The expansion will lose momentum in March, or April at the latest.

"Due to the surge in loans, the central bank has no need to cut interest rates right now.

TING LU, ECONOMIST WITH MERRILL LYNCH IN HONG KONG:

"From the macro perspective, it's very expansionary. I don't care about what kind of loan, whether short-term loans or bill financing or long-term. Close to one-third are still medium or long-term loans, so that's still a very big number.

"China is the first economy to see real credit expansion at this point in time, during this trough of the global slowdown. That differentiates China from other economies. Other countries, like the U.S., have the TARP programme and money injections to banks, but what's crucial for the economy is money from banks to the corporate sector and households."

LINKS:

For details, see the People's Bank of China website at http://www.pbc.gov.cn. Latest releases may not be immediately available.

MARKET REACTION:

-- The yuan stood at 6.8328 per dollar at 0226 GMT compared with 6.8330 before the data came out. The Shanghai stock market was down 0.56 percent compared with a fall of 0.64 percent before the figures were published.

BACKGROUND:

-- The State Council, or cabinet, has set a target of 17 percent M2 growth this year as part of a drive to make credit more easily available to the struggling economy.
[This target will be easily exceeded at the current pace]

-- As part of a switch in the second half of last year to a "moderately accommodative" monetary stance,
China has cut interest rates five times since mid-September lowered banks' reserve requirements four times. [which is why loan growth is exploding]

-- Banks have also ramped up lending in response to the government's 4 trillion yuan stimulus plan unveiled on Nov. 9.

But skeptics say a big chunk of the newly extended credit -- 39 percent in January -- has been in the form of short-term bill discounting, to ease firms' cash-flow strains, rather than longer-term infrastructure lending that will reap more solid economic returns.

--
Economists expect further cuts in interest rates and reserve requirements as policy makers strive to shield the economy from the impact of the financial meltdown [won' t happen, officials are worried about food prices because of drought], which has caused a contraction in exports for three months in a row.

My reaction: Unlike the US, China is having a lot of success at getting its banks to lend.

1) New loans denominated in the Chinese currency amounted to
1.62 trillion yuan ($237 billion), up 110% from 771.8 billion issued in December.

2) January new yuan loans are already one-third of the total extended in 2008.

3) The rapid growth in new loans was almost double the previous record a year ago.

4) China is the first economy to see real credit expansion at this point in time, during this trough of the global slowdown. Not surprising considering the strength of China' s banking system.


Conclusion: I bet that the explosion in new lending and Chinese money supply must have officials starting to worry by now. This kind of money supply growth could easily kick off a nasty jump in inflation, especially with China suffering the worst drought in decades. However, with exports falling 17 percent, Chinese officials don' t dare put the brakes on bank lending, which means February will likely see money supply growth accelerate.

Basically, Chinese officials are stuck between a rock and a hard place. They are trying to expand lending while printing trillions of yuan to maintain China' s dollar peg. They don' t dare stop doing either for fear of the economic fallout, despite knowing that doing both is guaranteed to fuel out of control inflation. Soon, skyrocketing food prices will force them to make a decision.

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0 Responses to Chinese loan growth and money supply surge in January

  1. Anonymous says:

    China really has its sh#t together. What they're doing is what the Japanese FAILED to do and that is cash in.

    The Japanese were so focused on exportation, they forgot that the only reason you export is so that you can import. They tried putting their dollars in US real estate, domestic real estate at exactly the wrong time which exascerbated the severity of the recession they had.

    The Chinese are trying to get something for their dollars before they're debased. They see the writing on the wall. They are still poor, but have all the elements for a continued, prolonged economic expansion making the case stronger for decoupling.

    They recently bought a large stake in Rio Tinto, which is an excellent play considering the value of Rio Tinto in this temporary period of delevering. They are going for REAL STUFF. They have the manufacturing capacity, they need the commodity one. Nothing better than investing those dollars during this artificially strong dollar period.

    The Chinese have all the components to make a decoupling happen. They need to get with OPEC and devise a new currency. They need to solve their political issues that seem to be coming out during this deflationary period (look out for the die hard commies in the party.) Finally, they need to spur domestic consumption to raise the standard of living for their citizens.

    If China can pull it off (and it is a HUGE if considering their political problems) they can be at the forefront of a new global renaissance.

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